Congress must protect vital drug patents from Wall Street attacks

Cutting-edge treatments for diseases affecting millions of Americans are threatened by Wall Street’s latest moneymaking scheme. The ploy: hedge funds bet against a drug company’s stock price, launch attacks against the firm’s patents on its best-selling medicines and then reap windfall profits when investors panic and the stock price plummets.

Unless Congress protects pharmaceutical-research firms from these assaults, funding for drug discovery will dry up and many new treatments won’t ever make it into the hands of patients.

Hedge-fund manager Kyle Bass pioneered the strategy, which relies on a new legal procedure known as “inter partes review,” or IPR. Earlier this year, Bass — who previously made $590 million betting that homeowners wouldn’t be able to make their mortgage payments during the financial crisis — filed a review against Acorda Therapeutics’ patent on a drug that helps multiple-sclerosis patients walk. The challenge caused Acorda’s share price to crash by 10 percent.

Wall Street began exploiting the system after Congress created the Patent Trial and Appeal Board, a new arm of the Patent Office tasked with taking a second look at patents that some consider too vague. Since its formation in 2013, the board has proven so hungry to annihilate patents that it’s been called a patent “death squad.”

Bass quickly saw how the board was wiping out patents and jumped at the chance to make money from a self-fulfilling prophecy: challenge the patent and short the company’s stock to profit on the market’s reaction.

Other funds have copied Bass’ strategy. The Mangrove Partners Master Fund acquired a 270,000-share “short” position in VirnetX, which owns patents for an Internet-privacy technology. Within weeks of filing two reviews against VirnetX patents, Mangrove unwound its short position, profiting from an 8 percent drop in the stock price.

Although these reviews can be filed against any patent, they’re particularly threatening to medicine patents and the companies that own them. With the cost of developing a new drug estimated at nearly $2.6 billion, biotech companies need strong patent protection to attract funding and keep competitors out of the marketplace while they recoup their investment. Wall Street’s abuse of these pharmaceutical reviews weakens patents and makes medical research look increasingly like a poor investment.

And with over 110 petitions filed against pharmaceutical patents in fiscal 2015 — roughly double 2014’s total — the threat to R&D funding is only growing.

Fortunately, Congress can protect drug development efforts while still enabling judges to weed out bad patents.

Under the Hatch-Waxman Act, more than 80 percent of drug patents are already challenged by companies seeking to enter the market with generics — compared to only 14 percent in the 1990s. Another law, known in Washington as “BPCIA,” also encourages challenges to pharmaceutical patents.

In short, if a drug patent is actually too vague, generic manufacturers can challenge and invalidate it and enter the market. IPR challenges aren’t necessary.

That’s why Congress needs to exempt pharmaceutical patents approved by the FDA from these challenges. Such an exemption would ensure that Wall Street profiteers don’t deprive innovators of research funding, while still being able to take down vague tech patents.

Preserving the existing patent-challenge procedures will ensure that companies have the confidence to invest in research and development and create the innovative, life-saving treatments patients need.

Peter J. Pitts, a former FDA associate commissioner, is president of the Center for Medicine in the Public Interest.